Fed Study: Trade War Is Harming American Manufacturing

Workers at Nissan Motor Company’s manufacturing plant in Smyrna, Tenn., in 2018. (William DeShazer/Reuters)Tariffs are reducing employment — and increasing the prices manufacturers pay for the materials they need.

NRPLUS MEMBER ARTICLEIt’s anyone’s guess what concessions the U.S. will eventually be able to extract from China as a result of the ongoing trade war. We’re in only “Phase One” of a solution, the details of which remain murky. Apparently the forthcoming agreement will scale back some tariffs and require China to buy billions of dollars’ worth of American agricultural products.

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What’s increasingly clear, however, is that the effort has come with substantial short-term costs. These include not only higher prices for consumers, but also damage to the very manufacturing sector the tariffs were meant to protect.

An elaborate new paper from two Federal Reserve economists tallies the various effects the tariffs have had on this sector. It finds that, on balance, the trade war has reduced U.S. manufacturing employment and increased the prices that American manufacturers pay for the materials they need.

Here’s a simple way of thinking about how the study works: The assorted trade-war measures affected different industries to different degrees and in different ways, and thus can be thought of as a sort of natural experiment. Basically, the researchers compared trends across different industries to see how they corresponded to changes in trade policy. How much did companies benefit when their foreign competitors got hit with tariffs? How much did they suffer when they had to pay tariffs on their own inputs, or when foreign nations slapped retaliatory tariffs on their exports?

The study does find a benefit from being protected from foreign competition, a perk the tariffs provided to some lucky industries within the manufacturing sector. But this benefit is canceled out, several times over, by manufacturers running into the new tariffs themselves.

The findings are best summarized in this series of charts. It breaks out the three big effects of the trade war and estimates their impacts on employment, production, and prices, yielding nine graphs in total. The vertical lines represent the first and last phases of tariff hikes, and the shaded areas represent “confidence intervals.” (I.e., the trend lines are estimates, and the true values very well might lie elsewhere in the shaded areas.) Don’t worry about the exact numbers on the Y axis, which involve logarithms; pay attention to which trend lines rise or fall most dramatically.

The clearest results are that rising input costs decreased employment (top left chart) and increased producer prices (bottom left), and that foreign retaliation decreased employment too (top right). On the other side of the ledger, import protection did seem to increase employment (top middle), though the effect is borderline in terms of statistical significance.

How does that all add up? Not well for American manufacturers and their workers. Comparing industries more exposed to each type of effect (specifically, industries at the 75th percentile of exposure) with those less exposed (at the 25th percentile), the authors find the former suffered a reduction in employment of “1.4 percent, with the positive contribution from the import protection effect of tariffs (0.3 percent) more than offset by the negative effects associated with rising input costs (-1.1 percent) and retaliatory tariffs (-0.7 percent).” The same comparison for producer prices reveals a 4.1 percent increase.

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These results must be seen in the context of overall trends. American manufacturing employment was on the rise in 2017 and 2018, but it stalled thereafter, when the tariffs were in full effect. A policy meant to promote manufacturing work may have contributed to its stagnation instead.

Now, a few caveats are in order here. As mentioned above, this is a very elaborate paper that entailed a lot of complicated number-crunching. It’s possible that there are other, equally credible ways of analyzing the data, or even that there are outright errors. And as the authors themselves stress, this is an analysis of the trade war’s short-term effects on American manufacturing; it doesn’t tell us what will happen in the future, or whether these costs are worth bearing for the pressure they put on China.

In the paper’s own words:

Some adjustment to the imposition of tariffs may take time as firms complete previously agreed-upon contracts with customers and suppliers. Furthermore, some effects may dissipate if tariffs were to return to their previous levels, while others may be longer-lived. We also note that this paper . . . does not explicitly consider the effects of increased uncertainty about future trade policy. Indeed, the increase in uncertainty generated by recent rounds of tariff increases may be one of the ways in which the effects of past policy persist.

Aside from the possibility the paper is just wrong, though, these limitations provide little comfort to the people who missed out on job opportunities thanks to protectionism.

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